Tips for Taxpayers With Hobby Income

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Any bookkeeping, business or tax article contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor can it be used to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.

Hobby activities are a source of income for many taxpayers. For instance, during the pandemic many people may have started making handmade items and selling them for a profit. As a reminder, this income must be reported on tax returns.

What is considered a hobby?

A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. This differs from those that operate a business with the intention of making a profit. When determining whether their activity is a business or hobby, taxpayers must consider the following nine factors:

  • Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.
  • If the time and effort the taxpayer puts into the activity show they intend to make it profitable.
  • When they depend on income from the activity for their livelihood.
  • Where any losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
  • Did they change methods of operation to improve profitability?
  • Does the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business?
  • Was the taxpayer was successful in making a profit in similar activities in the past?
  • Did the activity turn a profit in some years and how much profit it makes.
  • Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.

Reporting hobby income

All factors, facts, and circumstances with respect to the activity must be considered. And, no one factor is more important than another. If a taxpayer receives income from an activity that is carried on with no intention of making a profit, the income they receive must be reported on Schedule 1, Form 1040, line 8.

 

Questions?

If you have further questions, don’t hesitate to send us a message:

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